Mega-Solar Matchmaking in California

James Montgomery

Flexing its billion-dollar muscles once
again in the renewable energy space, MidAmerican Energy Holdings
Company (famously backed by Warren Buffett's Berkshire Hathaway
Inc. [BRK-A and BRK-B]) is buying two co-located solar projects in
California from SunPower [SPWR],
billed as the world's largest permitted solar PV power
development. The deal for Antelope Valley Solar Projects (AVSP),
totaling approximately 579 megawatts (AC) combined generation
capacity, is for an unspecified amount between $2-$2.5 billion.

A snapshot of MidAmerican Renewables' project
portfolio:

Solar: 1.271 GW - AVSP 1 & 2; the 550-MW Topaz project in San
Luis Obispo County, CA; and a 49% stake in the 290-MW
Agua Caliente project in Yuma County, AZHydro: 5 MW - A 50% ownership in the 10-MW "Wailuku" project
on the eastern coast of the island of HawaiiWind: 381 MW - Recent acquisitions of the 168-MW Alta Wind VII
and 132-MW Alta Wind IX projects in Kern County, CA; and
the 81-MW Bishop Hill II project in Henry County, ILGeothermal: 174 MW - Projects primarily in the Salton Sea area of
Southern California's Imperial Valley

To SunPower president Howard Wenger, this deal represents no less
than "a historic milestone for the energy industry."
Cost-competitive with natural gas peaker plants, the AVSP projects
define "a perfect example of how scale is driving cost reduction."

The
Facts About AVSP

SunPower
has been developing the two co-located AVSP projects for four
years, on 3230 acres of private property in Kern and Los
Angeles Counties near Rosamond, CA: the 309-MW (AC) "AVSP 1"
owned by Solar Star California XIX; and the 270 MW (AC) "AVSP
2" owned by Solar Star California XX, which according to SEC
filings includes the option to develop another 49-MW facility,
dubbed "AVSP 3." (There is no relation to the similarly named
230-MW Antelope Valley Solar Ranch One project, developed by
First Solar and sold in 2011 to Exelon, which is planned to be
fully operational by late 2013.) AVSP will incorporate
SunPower's own Oasis power plant modular solar technology,
high-efficiency solar panels, and trackers to boost energy
capture. The company will be the engineering, procurement, and
construction (EPC) contractor, and operate and manage the
facility under a 20-year services agreement.

AVSP has secured final conditional use permits and has
completed full environmental review pursuant to the California
Environmental Quality Act. Both projects are under two
20-year power purchase contracts with Southern California
Edison (SCE); grid connection will be through the Whirlwind
Substation being constructed as part of SCE's Tehachapi Renewable Transmission
Project. Construction of the plants, which will create
650 jobs, is slated to begin in 1Q13 and completed by the end
of 2015.

SunPower:
Balancing the Equation

From
the beginning, SunPower’s plan for AVSP has been to develop
the projects, get them financed (including finding an equity
owner), and then building and operating the projects with its
own technology. With AVSP’s size and scope, the company
specifically was seeking a partner "with a strong balance
sheet, who understood the economics and importance of
renewable energy," according to SunPower president Howard
Wenger. The bidding process was well underway by mid-2011,
with "very strong" initial interest from prospective
financiers — “We were very pleased with the level of
interest and quality of companies and offers,” he said.

Projects of this size and scope are getting harder and harder
to come by, and developers such as SunPower, First
Solar, and SunEdison are finding it tougher to refill their
pipelines, especially ones with the same favorable economics.
"They're selling projects that were priced a couple of years
ago when modules were expensive," points out Shawn Kravetz,
president of Esplanade Capital LLC. And now they're being
delivered in an environment where module costs are much lower
and likely will continue to go down for the next year or two.
He thinks 2013 will be "an unusually robust year" for those
big solar project developers that secured projects over the
past several years, but as they try to replenish their
pipelines, "high price and low costs — that's not
happening anymore."

SunPower in particular needs to keep feeding that downstream
business, asserts Kravetz, due to its relatively high-cost
manufacturing operation vs. a host of ruthlessly low-cost
competitors (think Tier-1 Chinese firms including Yingli [YGE],
Suntech [STP],
Trina [TSL],
and JA Solar [JASO]).
As more of these large profitable projects are harvested, that
upstream exposure will weigh even more heavily, especially in
a solar market that promises to remain challenging for the
next year. Stifling cost pressures is rough on the upstream,
but makes the financial equation more attractive on the
project development side of the equation.

Perhaps most importantly for SunPower: this deal represents a
vote of confidence from an up-and-coming energy player with
the desire and ability to invest substantially in renewable
project development. “MidAmerican Solar’s decision to invest
in these projects underscores the bankability and long-term
strength of SunPower’s business,” Wenger said. (Investors
agreed, spiking the company’s stock nearly 50% with 24 hours
of the deal, though they had pulled back about 12% a few days
later.) And as Kravetz points out, this isn’t exactly the
inimitable Warren Buffett stamping his approval of solar
stocks, but “it’s a company owned by him, saying these are
energy projects that are a good investment.”

MidAmerican:
Sealing the Deal

In Jan. 2012, MidAmerican Energy formed a new unit,
MidAmerican Renewables LLC, to manage and grow its renewable
energy interests — and the company has professed, and
proved, its appetite for renewable energy investments from Day
1. After one year, MidAmerican Renewables' total portfolio of
owned assets, including solar, wind, geothermal, and hydro,
now exceeds 1.83 GW, including the AVSP projects (see
sidebar). That's more than twice the size of the parent
group's 872 MW in natural gas energy generation projects.

These AVSP projects satisfied MidAmerican's criteria
checklist for any renewable energy generation investment: "All
the critical things we look for were there," explained Paul
Caudill, president of MidAmerican Solar. It's an area with
good solar insolation and a good weather record. There is
available land and land that can be permitted. Transmission
access is suitable for a grid-type plant, with both existing
infrastructure and commitment for network upgrades, Caudill
explained; the Whirlwind Substation is "well underway so we
know where they are at," and the Tehachapi interconnection
"also has very good progress." (MidAmerican was already
familiar with the local transmission infrastructure; its
recently acquired "Pinion Pines" wind projects, formerly
called Alta Wind, are also located in Kern County.)
Additionally, there are deals in place with California ISO and
a buyer in Southern California Edison.

One other aspect of AVSP's profile was attractive: it used
SunPower's technology, which is different than the First Solar
thin-film (cadmium telluride) technology used at MidAmerican's
Topaz and Agua Caliente projects. "We saw diversification as a
strong point," Caudill said. That "diversification" could put
MidAmerican in an excellent position to evaluate performance
of two competing solar PV technologies on a grid-scale playing
field: SunPower's higher-efficiency modules with trackers, vs.
First Solar's thin-film panels that have lower conversion
efficiencies but perform better in high-temperature
environments. MidAmerican, however, rejects that idea, saying
they see "tremendous benefits" in having both technologies at
its disposal, and it follows the parent company's pattern of
using different suppliers — for example, two types of
wind turbines (Siemens and GE) incorporated into its wind
projects in Iowa.

Beyond "Megaprojects," Going Distributed?

To feed its ravenous appetite for renewable
energy projects, MidAmerican keenly tracks what has been "a
tremendous amount of development in solar and wind in the past
few years," particularly outside of California, Caudill says.
"We're very in tune with the industry and where the good
markets are." MidAmerican currently has "a fairly sizable
pipeline of projects" that it is evaluating; "we're
comfortable that there are good solid assets out there."

But those attractive multihundred-MW megaprojects like AVSP,
with proven technology and PPA(s) in hand, are increasingly
hard to come by -- so MidAmerican is looking to add other
types of projects that make sense. "We don't sit down and say,
'we have to invest in a plant that's 100 MW or greater or
we're not interested,'" Caudill said. MidAmerican's sweetspot
for future renewable project development, Caudill said, "could
be substantially smaller than we see today." He expects over
the next few years the company will pursue more projects in
the 40-MW to 60-MW range, which have their own attractive
features: they require less land use, transmission
requirements aren't as stringent, and of course costs are
lower. And the convergence of costs coming down, energy prices
going up, and the economy picking up momentum, he said, opens
up emerging markets in areas not traditionally seen as "solar
states," in places such as Tennessee and Georgia.

And that likely includes forays into distributed generation
deals, Caudill pointed out. He envisions growing involvement
in "behind-the-meter projects," working with local utilities
and businesses to offset carbon footprints and compete at peak
power needs. "The distributed generation market, once it gets
fleshed out, could be very strong," he said.

The bottom line for MidAmerican is identifying places where
rates are high at peak and that are squeezed on the generation
side, Caudill says. "Those drive the market. It's hard to say
where we end up next — but I feel strongly that there are
opportunities out there."

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com,
covering the solar and wind beats. He previously was news editor
for Solid State Technology and Photovoltaics World, and has
covered semiconductor manufacturing and related industries,
renewable energy and industrial lasers since 2003. His work has
earned both internal awards and an Azbee Award from the American
Society of Business Press Editors. Jim has 15 years of experience
in producing websites and e-Newsletters in various technology.